Surveys Cite Confusion

Mutual Funds

Over Bank Mutual Funds

Regulatory Agencies Tackle Misunderstandings

March 14, 1994|WERNER RENBERG

If you think that the Federal Deposit Insurance Corp. would insure you against losing money on shares of a mutual fund bought at a bank, your view would be consistent with those expressed by most people questioned in two public opinion surveys.

You also would be wrong.

Whether a fund is managed by a bank or a bank affiliate - or by an independent investment adviser such as Kemper, MFS or Putnam - its shares are no more covered by FDIC (as bank deposits are) when you buy them at a bank than if you buy them from a broker.

The extent of confusion about insurance of bank-sold fund shares that seems to prevail among current and prospective fund investors was brought out last November, when the U.S. Securities and Exchange Commission, which regulates funds under the Investment Company Act of 1940, released the results of a survey it had commissioned.

It was reflected again in January in results of another survey, conducted for the American Association of Retired Persons and the North American Securities Administrators Association, to which the 50 states' securities agencies belong.

Even before these somewhat surprising findings were made public, regulatory agencies had perceived the apparently widespread misunderstanding and taken steps to deal with it.

Last May, the SEC staff had expressed its concerns to fund management companies. It advised those whose funds have names similar to federally insured institutions - and whose funds are sold or advised by them - to point out on the covers of their prospectuses that, among other things, fund shares aren't like bank deposits.

Bank regulators took similar steps, asking banks to distinguish the areas where funds are sold from other areas, to indicate in their literature that fund shares aren't insured, and to ask investors to sign statements that they understand this.

Moreover, legislation was drafted in Congress to require banks to take specific steps aimed at minimizing the possibility that bank customers would be unclear as to whether fund shares were uninsured.

The concerns are easy to understand.

Although banks have been custodians of mutual fund assets and transfer agents for many years, they had not played a major role as fund investment advisers or as a distribution channel until recently. By now bank-advised funds account for 11 percent of the $2 trillion assets of all mutual funds, according to Lipper Analytical Services.

The growth of their fund sales is attributable, to a great extent, to the lower interest rates of recent years, which have led many depositors to seek higher yields and total returns in equity and bond mutual funds.

Losing deposits on which they would have liked to earn interest income by making loans, banks have decided to compensate by earning fees for managing mutual funds or selling fund shares.

These and related points were aired a few days ago, when the House Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance held a hearing on the proposed legislation.

"We must ensure that banks and thrifts structure their mutual fund operations so as not to create unacceptable risks to the institution or to the FDIC," Chairman Stephen L. Neal (D-NC) said in opening the hearing.

A panel of four from bank regulatory agencies - FDIC's acting chairman, Andrew Hove Jr.; Federal Reserve Governor John P. LaWare; Eugene Ludwig, the Comptroller of the Currency; and the Office of Thrift Supervision's acting director, Jonathan L. Fiechter - expressed their concerns and described their efforts to deal with the problems.

Representatives of four banking industry associations challenged some of the survey conclusions, described what banks have done to comply with the regulators, and agreed that legislation isn't needed.

Matthew P. Fink, president of the Investment Company Institute, shared concern about the risk of investor confusion, described ICI's education programs - and went beyond the narrow focus of the hearing.

Repeating a familiar ICI position, he urged that the SEC's authority over banks' mutual fund sales and advisory activities be extended to areas from which it has been excluded - a position contrary to that of Rep. Neal. (Neal's view apparently explains why SEC Chairman Arthur Levitt was not invited to appear).

"All participants in the mutual fund industry should be subject to the same regulation, enforced in the same manner by the single agency that Congress created to protect investors - the SEC," Fink said. "No other federal agency has comparable ex-per-ience."

Extension of SEC's authority is included in another House bill, introduced with bipartisan support, on which the Subcommittee on Telecommunications and Finance of Rep. Edward J. Markey (D-MA) will hold hearings soon.

Fink also took the opportunity to announce important new ICI positions: banks should be permitted to sponsor and distribute mutual funds, and bankers should be permitted to serve on fund boards.

While these regulatory and legislative activities are important, of course, investors who have no illusions about FDIC insurance of bank-advised funds may be equally interested in their performance.

Lipper calculates that, on the average, the total returns of bank-advised equity and bond funds lagged the average of all other funds in the year and five years ended Feb. 28. Bank-advised money market funds had a slight edge, however.

-- Werner Renberg is a syndicated columnist and author of books about mutual funds.